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Stocks entering worst two quarter stretch of the presidential cycle

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Dana Lyons is senior vice president at J. Lyons Fund Management in Deerfield, Illinois and the architect of its Relative Strength Fund. He earned a Bachelor of Science degree in Economics from the Wharton School of Business at the University of Pennsylvania. Follow Dana on Twitter > @JLyonsFundMgmt.

The Presidential Cycle refers to the pattern of behavior in stock prices throughout the four years of a presidential term. While there are many factors influencing stock prices during a particular period of a particular presidential term, it is one of the more historically consistent seasonal patterns. Specifically, stocks tend to be strong during certain periods of a president’s term and weaker during others. Historically, the worst 2-quarter stretch of the presidential cycle is the period spanning the 2nd and 3rd quarters of the second year of a President’s Term. This stretch begins on April 1.

Over the past 100 years, the average return in the Dow Jones Industrial Average for the 2-quarter stretch ending with the 3rd quarter of year 2 of the presidential cycle is minus 1%. Not only is that much weaker than the average return of all 2-quarter periods of 3.5%, it is the only 2-quarter stretch of the entire cycle that is materially negative on average.

There is hope for the bulls, however. First, since there are many factors besides the presidential cycle that affect stock prices, it should only be treated as a gentle headwind. Second, if last year is any guide, the current bull market may be capable of overcoming the historical tendency for weakness over the upcoming two quarters.